Insurance Transparency Project

I-Pals,

Before we get to the big news out of the Third Judicial Circuit, in Philadelphia, I’d like to squeeze in this story:

U.S Study Finds Majority of Medical Malpractice Claims Close Without Payment.

It describes a new study by the DOJ’s Bureau of Justice Statistics that supports a growing suspicion around ITP HQ that there is much less than meets the eye to the med mal crisis often described by my pals at American Tort Reform Association and the Insurance Information Institute. This is the alleged crisis in which reckless plaintiffs lawyers gull “runaway juries” sitting in “judicial hellholes” into bankrupting insurers over meritless claims, and forcing them to charge premiums for some doctors of up to $200,000 a year — wrecking havoc on the health-care system, driving doctors out of surgical and OB-GYN specialties, requiring tort reform and caps on punitive damages, etc. It turns out there aren’t that many claims and most result in zero payments.
The study appears to support Prof. Tom Baker at U Conn.’s Insurance Law Center and his tremendous book, The Medical Malpractice Myth, a bargain at $22.50 hardbound, and now in paperback at $14 (poverty is no longer an excuse). ITP understands that the book is now being made into a major motion picture starring John Malkovich(1).
As the blub says:

“Are there too many medical malpractice suits? No, according to Baker; there is actually a great deal more medical malpractice, with only a fraction of the cases ever seeing the inside of a courtroom.”

The BJS Med Mal Study (pdf), also on ITP’s key documents page, studied seven states from 2000 to 2004 and found that of the fraction of medical accidents that actually wind up in court in Illinois, for instance, only 12% of those result in any payment at all, with only a few cases resulted payments of $1 million or more, generally instances in which the medical provider “engaged in reckless or criminal behavior.”

So why tort reform?

Ok, le tout monde d’assurance is abuzz with the April 3 Third Circuit decision that allows policyholders to sue insurers for fraud under the civil Racketeer-Influenced and Corrupt Organizations law, significant because it allows policyholders to bring a powerful federal law to bear despite McCarran-Ferguson, the 1945 federal law that generally leaves insurance regulations to the states and to state law. RICO, among other things, allows for triple damages.
The question was whether the use of RICO would “impair” the state’s regulatory regime, as First Unum, a unit of UnumProvident, now just Unum, had argued. It said allowing policyholders to sue under RICO would frustrate New Jersey’s “comprehensive” regulatory regime. The court found, to the contrary, that the use of RICO would “augment” it.

The Legendary Gene Anderson tells us in an Anderson Kill & Olick press release that the Weiss decision follows and expands upon a 1999 U.S. Supreme Court decision, Humana v. Forsythe, which allowed the use of RICO in Nevada, which has explicit state laws against fraud by insurers. Weiss means that RICO can be brought in states even where anti-insurer-fraud laws are less explicit. AKO wrote an influential amicus brief filed by United Policyholders in Humana(2) and cited by the high court.

The legal details are of less interest to ITP than the fact that more interesting data may be forthcoming about Unum, about which more is to come from here in future posts.

1. Also starring Clive Owen as the embattled but fun-loving Washington Post reporter who reads it and War Eagle as himself.

The Few, The Proud, The Insurance Notes! Reader:

Welcome to the all-volunteer ITP, a lean, hungry strike force of devoted insurance readers.

Don’t forget to sign up for the ITP Final Exam/Annual Meeting. Please note, the location has changed: Instead of the Javitz Center, we’ll be holding the event in a tan 1975 Fiat 124, Illinois license plate DA 9971, in the Jewel parking lot, corner of Chicago Ave. and Hamilton St., Evanston, Ill. Chips and Miller in quarts will be served.

Seriously, many thanks to those who signed up, especially to members of the insurance industry. I find that kind of openness to alternative views to be very cool. Sorry I didn’t write back to the many personal notes.

A quick one today, but just to note that Connecticut Attorney General Richard Blumenthal has picked up where Spitzer left off and has been on a sustained campaign as that state’s de facto insurance regulator, this in Hartford, traditionally the nation’s insurance capital.

His office has recently announced major settlements against the once-tolerated-but-nonetheless corrupt practice of insurers paying brokers to steer corporate business their way. The cases involve important insurers, including Chubb ($17 million fine), St. Paul Travelers ($77 million), The Hartford ($20 million), Ace ($80 million), Zurich ($153 million, involving several states) and a new lawsuit against Liberty Mutual alleging a bid-rigging and kickbacks conspiracy.

Which raises the question: Who is Connecticut’s insurance commissioner and what does she make of all this? Turns out the commissioner is Susan F. Cogswell, a former Travelers and Chase executive and nine-year veteran of the Torrington City Council. Her only news release this year is about a restitution agreement with Assurant Inc., in which the company admitted to wrongfully denying health claims, in ITP’s view, a serious breach of trust.

What’s interesting about Blumenthal’s response — that’s here: Blumenthal Press Release vs. Conn. DOI — apart from the fact that he makes a response, is that it utterly ignores protocol and criticizes his fellow regulator in the most explicit terms.

“After seven months of prodding and cajoling the DOI into action, Blumenthal said patients who complained to his office will likely get the benefits they are owed from Assurance Health.” He faults the deal for containing no penalties, with many heated adverbs:

“This order is tantamount to telling a thief to return stolen money — but imposing no punishment,” Blumenthal said. “Patients will finally get the benefits that we vigorously fought tenaciously to achieve for them, but this this order fails to impose the significant penalties warranted for Assurant’s abusive, anti-consumer practices. This step is a slap on the wrist — not even even a slap — and even worse may tie our hands in pursuing more aggressive legal action under insurance statutes.”

He noted a case in South Carolina, Mitchell v. Fortis, in which a jury imposed bad-faith penalties of $15 million against Assurant and the court found its conduct “highly reprehensible.”

Blumenthal says Commissioner Cogswell promised to do an an audit of Assurant, but instead delivered this agreement, no audit. The Assurant scenario will sound familiar to students of the UnumProvident case, in ITP’s view the worst/best insurance story in recent times, and that includes Katrina. Much more on Unum later.
And while it is true that Mississippi Attorney General Jim Hood’s lawsuits against insurers post-Katrina (go to the site and search under “Hood”) is an implicit slap at Commissioner George Dale, Blumenthal here takes the gloves off.

Thanks to The White Collar Maestra.

I-Fans.

That’s right. ITP is going all-volunteer. Since Oct. 5, 2006, I’ve e-blasted these notes to a list of about 250 people. Not all of them asked for it, however, and over the past five months (feels like forever, right?), some have asked off, and probably more have asked on.

I’ll continue to post to the web with some frequency, and I WILL blast emails to those who want it. But it’s time the Eagle and I stood on our own four feet.

So, to get off the list, DO NOTHING. And don’t feel bad about it. As I’ve said, I consider receiving of these a favor.

To stay on, please reply “ITPlease” (no quotes needed); I’m using that funny word so I can easily search for it in gmail.

I’ll probably send out one or two more of these notices, and that’s it.

As a bonus, I add this nugget from something called NU Online News Service under the headline:

“NAIC’s Bell Nixes Small Insurer Exemption Idea”

Not to make fun of a man’s name, but check out the byline:

BY ARTHUR D. POSTAL

Never mind the subject of the story. It’s not the point.

But I call your attention to the last paragraph, part of an interview with Walter Bell, Alabama’s insurance commissioner and the head of the National Association of Insurance Commissioners, the regulators’ trade group (um, no time to unravel that one today). I think if I just add a little bold face, no further comment from me will be needed.

“He also defended the industry�s handling of claims resulting from
Hurricanes Katrina and Rita.

Asked to respond to comments by Sen. Lott at a hearing last week that
the industry�s conduct in handling those claims was �outrageous,
arrogant and mean-spirited,� and that state Attorney General Jim Hood
had �a lot of evidence of misconduct and fraud� by State Farm in
handling of claims, Commissioner Bell said he had talked to a lot of
chief executive officers of companies involved in insuring Mississippi
homeowners, and that ‘they did the right thing.’ “

Funny, but not.

Thanks to the Boulevardier of Loone Lake and to one and all for being part of the ITP family.

I-Fans,

It would be hard to overstate the significance of yesterday’s verdict in which a New Orleans federal jury found that wind, not water, wiped out a Slidell home owned by the Weiss family.

Allstate spokeswoman Kate Hollcraft said the company was “shocked” by the verdict, but it shouldn’t be.

Evidence at trial showed that the Lake Pontchartrain storm surge rose only 14 feet, but the house was built three feet higher, and second, that Allstate’s own engineer initially leaned toward winds as likely wiping out the house. Here’s the Times-Picayune:

“Jim Neva, a surveyor and engineer who inspected the house for Allstate, initially told Robert Weiss, who is listed as the policy holder, and his wife, Merryl, that wind may have destroyed the home before the surge of water washed away its remnants. He later backed off that conclusion, and deferred to engineering consultant Craig Rogers of Rimkus Consulting Group.

Rogers, who wrote the final report on the home for Allstate, convinced Neva that storm surge demolished the house. Rogers said he didn’t personally inspect the property until after he wrote the report. He said he based his conclusions in part on evidence gathered by other Rimkus engineers — a practice he described as common.”

Good luck with that, Craig. Rimkus, you will recall, is under fire in Mississippi as independent engineers hired in the scramble after Katrina have come forward in cases brought by the Merlin Law Group to say that their reports were altered. I’ll paste a headline because I’m having trouble finding a link.

The Weisses got about $35,000 on a policy with a limit of $583,000, so less than 10 cents on the dollar. Allstate argued that flood did most of the damage, and that the family got paid, $350,000 from the flood program(1).

Allstate’s lawyer, Judy Barrasso, said sustained winds at the house did not exceed 100 mph. “There was plenty of evidence to show the winds were not strong enough to topple this house and the storm surge was,” she said.

Fair enough. But if you’re an insurer, you could find plenty of evidence that the Category Three-plus winds were devastating, including the eyewitness who told me in my pre-ITP days that he saw houses in Slidell collapse like “a deck of cards” long before the water rose (find the last story in the column). One his neighbors and an ITP correspondent is an MSU meteorologist who put together an extensive report, which I will post as soon as I get permission, on Katrina wind speeds.

But, that’s what juries are for. And I know insurers benefit from an unspoken assumption from us big city geniuses and paragons of fairness that juries in the South and in rural America — let’s admit it, WSJ edit page — just aren’t serious. That’s, um, false. This jury, for instance, found that any flood payments must be deducted from the amounts insurers owe, which is only fair.

And lastly, I add this coda from Louisiana Lawyer Supreme, who, if he’s not careful, will be pressed into a guest-blogging role. I edit for length; the full comment is on the site.

“Allstate has started to send out notices telling policyholders (like me) that their renewals ‘will include a new endorsement, which excludes coverage for loss from windstorm or hail.’ …Frankly, I don’t know what use I can make of ‘insurance’ that doesn’t protect me from losses from hurricanes. Isn’t that sort of like beer without alcohol? (War Eagle comment:  “Das iz gut!”) … The notice helpfully adds: “Louisiana has a program called Louisiana Citizens Property Insurance Corporation that may be able to provide you with this coverage… They can’t cancel you, but they can foist the real risk off to the public fisc, and make money while doing so. Maybe the guys at McKenzie are not the smartest in the insurance ‘room’ after all.”

Thanks to Ida, our newly deputized ITP correspondent and assistant War Eagle, Jim, and LLS.

1. The story doesn’t say who adjusted the flood claim, but usually a single company handles both wind and flood. And, yes, that is a conflict of interest, although arguably a manageable one. However, I’m not sure, frankly, the program’s administrator, Computer Sciences Corp., creator of “Colossus,” is on top of it. In any case, Sen. Lott added this provision to the budget bill in February, as the Times-Pic reported:

“One of the few specific Katrina initiatives in his budget calls for the inspector general of the Department of Homeland Security to investigate whether insurance companies were right to attribute a significant amount of Katrina damage to flooding rather than wind damage, significantly reducing the industry’s liabilities. Congress is already planning hearings on the subject.”

Hail, Royal I-Nesses,

I call attention to a March 22 decision in Gulfport federal court in which Judge Senter rejected policyholder Judy Guice’s request that her case be certified as a class action. The decision is up on ITP’s Key Documents section, the third “Guice” document.

The decision — as usual, well-reasoned — nonetheless means cases against State Farm will stretch on for years, effectively ending the battle before it begins.
In a Sun Herald story, Lawyer/philosopher/Pride of Batesville, Richard T. “Flip” Phillips, looks for the silver lining from his perspective: State Farm must prove in slab cases its excluded peril — rising water — did the damage.

“This rule of law concerning the allocation of the burden of proof will apply to all cases brought against State Farm under this form of its homeowners’ insurance policy, and establishing a class action is not necessary to establish its general applicability.”

State Farm gives a thumbs up. Note the language, which will become important in a few paragraphs:

“We are pleased with Judge Senter’s affirmation,” said Fraser Engerman, a spokesman for State Farm. “Each claim is unique and no two property owners experienced the same type of loss. It is only right each claim be tried in court separately. We have evaluated every Mississippi claim based on its own merits and are committed on paying what we owe based on our contract with each policy owner.”

Ok, we now return to Berardinelli et al (1), the book that puts into the record notes on 15,000 PowerPoint slides prepared by McKinsey & Co. for Allstate. As we recall, in advance of its 1993 spinoff from Sears, Allstate hired McKinsey, which promised to boost earnings by 5% to 15% with a program, CCPR, intended to “radically alter” (Slide 5166) the business of claims. And they did, with a Good Hands vs. “Boxing Gloves” — McKinsey’s words — strategy to set firm offers, then “aggressively manage” claims in which a policyholder hired a lawyer (Slide 2932). The strategy anticipated, even welcomed, higher litigation rates (Slide 6325)(2) and said the “new game” meant that other constituents, including policyholders, “must lose” (Slide 1426).

But how to determine the initial offers? On McKinsey’s recommendation, Allstate bought Colossus, the trade name for software developed by Computer Sciences Corp., a big vendor to the insurance industry and to the federal government. And no, I’m not making that name up. Colossus’s main feature is that it can be “tuned” to generate claims “savings” at the discretion of regional managers.

McKinsey found that claims handled by Allstate’s own adjusters — insurance professionals — resulted in so-called overpayments of as much as 20% (Slide 710: “Evaluations within an adjuster’s authority level often resulted in significantly higher overpayments”). The overpayments assertion was never supported.
To solve the newly identified problem, Colossus automated the claim-evaluation process by calculating average risk costs from about eight “benchmark cases,” hypothetical scenarios in which in each case the claimant is a 24-year-old white male. A “benchmark tuning committee” of managers in each region is then instructed to arrive at a consensus figure for each case, using the “most conservative” value. The system is then “fine tuned” by picking 8-16 closed cases representing the insurer’s “best” claims settlements. Excluded from the benchmark samples are cases that involve lawyer-represented policyholders, jury verdicts, settlements at the full policy limits and other factors that would skew the average higher.
Field-tested in North Palm Beach, Fla., and two other offices, Colossus produced values 55% lower than the actual settlements, the ones adjusted by Allstate humans.

Berardinelli adds:

“Regions can be re-tuned by an Allstate manager is less than 30 minutes without interaction with, or help from, the insurers’ computer support staff or CSC employees. Essentially, the manager simply enters the percentage reduction in severities desired and the Colossus tuning macro does the rest.

And here’s an important finding: Internal memos suggest that some Allstate managers — trained insurance executives — didn’t like Colossus and ignored its values because they did not believe the tuning process was proper (Slide 10685: “…numbers indicate that some ‘burning issues’ remain and require immediate attention….” One of those, Slide 10685, “Lack of buy-in in some markets due to belief tuning is not proper”).

This is important if you believe, as I do, that insurance has undergone a profound cultural shift — as has other once-clubby industries like accounting and law — since the 1980s (3); obviously there had to have been a culture the industry shifted from.
Berardinelli smartly characterizes this process as an undisclosed shift from casualty insurance, which pays losses resulting based on individual circumstances, to a defined-benefit paradigm, in which a fixed amount is paid for a specified injury regardless of actual losses, a feature of workers’ compensation programs.

Trouble is, insurers charge for casualty insurance. And part of the whopping 20% of premiums that goes toward expenses is supposed to pay for all this individual handling.

Now, remember the words of State Farm spokesman Engerman. The reason suits against the company should not be consolidated into a class is because, “each claim is unique and no two property owners experienced the same type of loss.” It is only right each claim be tried in court separately. We have evaluated every Mississippi claim based on its own merits,” etc.

The McKinsey/Colossus system at State Farm is known as “Processing And Claims Excellence,” or PACE.

While the McKinsey slides deal with auto claims, I obviously suspect that CCPR/PACE is applied to all consumer insurance, known as personal lines.

(1) From “Good Hands” to Boxing Gloves, Berardinell, Freeman and Shaw, Trial Guides, 2006)

(2) Private note to Person Familiar: McKinsey says it, not me.

(3) Bad-faith legend Gene Anderson calls this the “Greenberg Principle.”

I-Fans,

A quick one today. I submit this Sun Herald item from a couple weeks ago that says Rep. Gene Taylor, D-Miss., was reprimanded for violating Congressional etiquette by telling a Republican Congressman from Suburban Atlanta that he should have “the decency” to visit the coast before requiring cities there to meet federal matching requirements for aid.

“Mr. Price, I wish you would have the decency if you are going to do that to the people of South Mississippi, that maybe you ought to come visit South Mississippi, and see what has happened before you hold them to a standard that you would never hold your own people to, and that you failed to hold the Bush administration to.”

Taylor’s remarks were “taken down,” or stricken from the record.

Price seems mostly puzzled.

“In an interview, Price…said he was promoting ‘a benign amendment on fiscal responsibility.’

‘It’s a common-sense kind of amendment,’ he said, to make localities accountable for federal funding. Price felt Taylor’s tactic was to ‘personalize the argument.’ “

I’m sure he’s right. The point here is, it’s impossible to understand how bad it is on the Gulf unless you spend some time there — something even insurer pals and bad-faith mavens can agree on.

It’s not just the strikes, murders and political and legal dysfunction or the fact that half of New Orleans is gone and isn’t coming back. Citizen Nossiter, the indomitable Mowbray and the indispensable Anita Lee can write all day, and they do, but it’s hard to track the spread of depression, to link suicides to any particular thing or capture the mood of despair. Taylor is talking abut Southern Mississippi, but New Orleans is much worse.

Social and political chaos aside, I’ve got to pose this to my insurer pals: Let’s assume for the sake of argument that Dr. Hartwig’s view is essentially correct: That the thousands of unhappy policyholders as measured by law suits (which I say should be multiplied by a factor of 10, because most people don’t sue) misunderstand their policies or, in any case, were just underinsured and are trying to change their contracts after the fact.

Here’s my point: we spent at a minimum of 20% of every premium dollar selling, delivering and administering p/c insurance. That’s about $84 billion a year, more than enough — according to McKinsey (!) — to provide health insurance to every uninsured man, woman and child in the country ($77 billion).

But let’s say only 7% ($29 billion) of premiums goes to brokers and agents, with their Ford Tauruses, bad haircuts, storefront offices, etc. A 7% percent load? For what? For those prices, people shouldn’t have to even think about insurance. Their perfect policies should be hand-delivered in leather-bound volumes. And if holders are too cheap to pay for what they need, they should get a letter written with a quill on parchment saying so.

But here’s a better idea: Let’s dismantle this whole apparatus — I know President Coolidge was probably fond of it, but still — and move it online. You’d surprised how far $29 billion per year goes.

Hey, and read me on CJR.

Fellow Surplus Lines, Casualties, Excess Liabilities, Catastrophic Risks, Lloyd’s Names, Bermudans and Other Income-Smoothing Devices:

First, my heartfelt apologies for the long paws (honk) between this post and the last one. Also, my heartfelt apologies for writing again so soon.

A little housekeeping: a hearty ITP welcome to my Dad’s pal, Esteemed Southside Psychology Colleague — a speedy and full recovery to one and all — as well as to another Bad-Faith maven.(1)

Also, if you just aren’t getting enough, I am now up on the journalism site of the major Ivy League institution. Finally, look for the upcoming tour for my new memoire: “Mir Yiddische Insuransche Bubbeh; or Seiche! That Was Some Storm!”

Ok, now installment two of ITP’s book report on Berardinelli et al (2).

Last time, we introduced the landmark book that brought to light consulting giant McKinsey & Co.’s project to, in McKinsey’s words, “radically alter” (3) Allstate Corp.’s approach to claims through a re-engineering project known as “Core Claims Process Redesign,” or CCPR, which was reproduced at other insurers. At State Farm it was called “Advanced Claims Excellence,” or ACE, at USAA, PACE, etc.

We saw that it was dramatically effective from Allstate’s shareholders’ perspective. A five-fold improvement in yearly earnings is dramatic by any standard. We should have added that Berardinelli calculates CCPR had resulted in $6 billion to $15 billion in additional net income by fighting minor claims, which is make up the bulk of payouts.

The slides are mostly about auto claims. The strategy involved “managing the components of severity” — that is, how much Allstate paid in auto cases involving bodily injury, uninsured or underinsured motorists (BI, UM/UIM) claims — and to “significantly alter representation rates,” (3) that is, to adopt a “boxing gloves” (McKinsey’s word) strategy for policyholders who hire lawyers.

McKinsey promised a 5% to 15% reduction in claims payouts, and delivered far more. The language in Slide 30 gives a clue as to the culture shift: “Claims is not one homogeneous portfolio where one winning formula can be applied across the board.” Heretofore, claims per say were not considered an adversarial part of insurance.

Slide 2360 says “capturing the opportunity” would require “reducing the number of represented claimants and more aggressively managing the claims that do become represented.” Remember, the criteria is not rooting out insurance cheats, but going after policyholders who hire lawyers.

Why? Slide 6038: “According to Field Survey, weighted average loss payout by injury for BI and UM/UIM (uninsured/underinsured motorists) is at least 50% higher for attorney represented claims compared to nonrepresented claims.” That’s because policyholders are amateurs in handling their own claim; but then, according to insurance law, they’re supposed to be. You don’t need to be a banking lawyer to make a withdrawal.

I won’t go into the tactics for “aggressively managing” represented claims because it just annoys War Eagle to read about abuses of legal process.

Below, if you prop your computer up on its left side and get out a magnifying glass, you will see how McKinsey sees how to change the “current game” to the “new game.” The graph shows how fairly uneven rates of settling claims — because claims do involve different people, different injuries, different circumstances — suddenly will become uniform. Why? Because policyholders will be presented with a single offer to take or leave. The choice becomes accepting it or fighting for years.

A particularly regrettable feature of CCPR was to accept — indeed to provoke — higher litigation rates. Slide 6325: “A key part of this process will be development of market-wide strategies to strengthen negotiation and litigation approaches. These strategies will include significantly higher levels of litigation to establish more consistent values.” The emphasis is mine.
(There is irony in the “consistent values” thing, which we’ll get to next time.)

As Berardinelli writes:

“Allstate would pay casualty claims ‘promptly,’ within about six months, if the policyholder were willing to give Allstate shareholders a ‘cut’ from their fair share of the claim fund. McKinsey was betting around 90% of policyholders would do just that — willingly give Allstate shareholders a cut from their share of the claim fund without a fight.”
And:

“…McKinsey’s ‘no negotiating,’ Enron-style settlement strategy was deliberately designed to drive unwitting policyholders and claimants headlong into the ‘kill box’ (Berardinelli’s word) of McKinsey’s Zero Sum Economic Game — the American judicial system.”

Next time: Berardinelli and the McKinsey Slides (III) — Comes “Colossus.”

Private Note to the Stout-Heart-Princess-of-Ward-8: I recycle jokes, you see.

1. All opinions expressed herein are The War Eagle’s alone and may or may not reflect the views of Dean Starkman, Insurance Notes!(TM), The Insurance Transparency Project, its directors, officers, assignees, vendors, subscribers, joint-venture partners, shareholders, bondholders, trading desk, floor brokers, telephone clerks, specialists, agents, underwriters, alumni, mohel, shochet, beadle, medical staff or coffee-cart personnel. Void where prohibited. Must be over 47 years old or show written permission from Cool Texan. Post no bills. Do not take with alcohol. Not valid in the event of hail, tidal wave, seiche, frogs, volcanic eruption, Act of War, avian flu, storm surge, locusts, slaying of the first born, rising water, falling water (”rain”), horizontal water, heavy water, sparking water, mineral water or Fresca(TM). Use only as directed. See “Rider” for details.

2. From “Good Hands” to Boxing Gloves: How Allstate Changed Casualty Insurance in America, Berardinelli, Freeman and DeShaw (Trial Guides LLC 2006)

3. “Our change goal is to redefine the game…to…radically alter our whole approach to the business of claims,” (McKinsey Slide 5166.)